Would a more experienced options trader help me understand the flaw in my logic? Thanks.

[Mtandk0614]

I just started trading options a few months ago. I own a few 100 shares of a couple of stocks so I have sold some call options at levels I would be fine selling them.

I started working with put credit spreads on SPY and have made a couple of profitable trades but I noticed something and I am not sure if I am being a rookie or making a protected position.

I found that as the price goes down on the SPY, the premium for puts below the price goes up. So I started opening a put credit spreads rather low OTM for an amount of premium then I immediately placed an order to close the spread which is a debit. But I make that debit 50% of the premium earned.

My logic is that if the price starts falling, the premium at the strike prices would increase and should get filled leaving me with 50% profit prior to the position ever becoming ITM.

An example may be if the SPY is currently trading at $380. I Sell the put @ 374 and I buy the put @ 373 for a premium of $8.
Then I immediately place a position to buy the put @ 374 and sell the put @ 373 for a debit of $4.

If the second position is never filled, I cancel it and close my position just prior to execution. But if I am away from the market and it goes down, it would hopefully execute to close order and I would still keep some level of profit.

Any feedback on this thought process would be appreciated. Thank you.

 

[knowledgeseeker123]

I just started trading options a few months ago. I own a few 100 shares of a couple of stocks so I have sold some call options at levels I would be fine selling them.

I started working with put credit spreads on SPY and have made a couple of profitable trades but I noticed something and I am not sure if I am being a rookie or making a protected position.

I found that as the price goes down on the SPY, the premium for puts below the price goes up. So I started opening a put credit spreads rather low OTM for an amount of premium then I immediately placed an order to close the spread which is a debit. But I make that debit 50% of the premium earned.

My logic is that if the price starts falling, the premium at the strike prices would increase and should get filled leaving me with 50% profit prior to the position ever becoming ITM.

An example may be if the SPY is currently trading at $380. I Sell the put @ 374 and I buy the put @ 373 for a premium of $8.
Then I immediately place a position to buy the put @ 374 and sell the put @ 373 for a debit of $4.

If the second position is never filled, I cancel it and close my position just prior to execution. But if I am away from the market and it goes down, it would hopefully execute to close order and I would still keep some level of profit.

Any feedback on this thought process would be appreciated. Thank you.

If you sell a Put at 374 and buy one lower, at 373 this is a PCS (Put Credit Spread). If you sold that PCS for $8 you are correct, you want to buy it back for less than that. The difference is your profit (less commissions, charges etc) So placing a GTC order for a lower value is a sensible strategy. Bear in mind if the market rises quickly your PCS may be worth even less then your GTC but you will be out at whatever your GTC is set at so there could be some lost profit opportunity. But if you're away from your computer anyway then it's a moot point.

 

[sideways-sid]

The original post and/or logic are a bit muddled.

Think in terms of Value at Risk, which in your example @Mtandk0614 is USD92 per contract.

 

[Windlesham1]

A put credit spread only makes money if it stays out of the money. You win if market goes nowhere, or up. You won't get wiped out but it's unlikely to do well in the long run.